Yet another episode in the battle of the regulators against Bitcoin et al unfolded last month as news began doing the rounds that a Bill proposing a ban on these assets has been listed in the Lok Sabha bulletin. The RBI Governor did his bit to increase the anxiety of users by stating that the central bank had ‘major concerns’ regarding private cryptocurrencies.
The Finance Minister has, however, assuaged sentiments by stating that there will not be an outright ban on private cryptocurrencies and there will be a window available in which experiments can take place. She has also stated that the government would be taking a ‘calibrated’ approach towards these assets.
It is not difficult to see what is worrying the Centre and the RBI. Bitcoins and the bevy of other crypto assets such as Etherium, Litecoin and Polkadot operate in a boundary-less digital world, in total regulatory vacuum. The Centre is clearly concerned about investors burning their fingers trading in these assets; the price of Bitcoin rose 68 per cent in the first two months of 2021, following an over 300 per cent rally in 2020. The RBI is concerned about money laundering and terror financing through cryptocurrencies.
But the experience of the Indian and other global regulators over the past decade shows that banning private cryptocurrencies in one country makes the ecosystem go underground while continuing to proliferate in other countries; quite akin to the whack a mole game.
Perhaps, India can take the lead in setting up a supervisory framework for private cryptocurrency mining, possession and trading. This can help address the RBI’s concerns while helping earn some revenue for the exchequer.
Impossible to ban
The basic structure of cryptocurrencies makes it downright impossible for any regulator to ban their creation or exchange. The creator of the cryptocurrency concept, rules and framework is anonymous and it is now owned by public at large, worldwide. It is not possible to pin down the ownership of the copyright on any one individual or company.
Similarly, the mining and maintaining of the open ledger is done by common people scattered across the globe. Even if one country clamps down on mining, it can be done in others.
And, then, there is really nothing wrong with the actual process of mining for cryptocurrencies that can be termed illegal or criminal. The creation of cryptocurrencies is similar to other geeky pastimes such as creating intricate software codes or apps or solving complex puzzles
Even if India bans the mining and trading of private cryptos, they will continue to be mined in other countries. These activities are likely to continue within India, too, since it is quite difficult for regulators to track these digital activities. With most of the miners being rebels against the existing system of fiat currencies, they may not be willing to listen to government diktat and cease their activity.
Closing down domestic trading platforms for cryptocurrencies is likely to be equally futile since it is quite easy for Indians to trade on overseas platforms.
This was evident in 2018 when the RBI had asked financial institutions to stop facilitating transactions involving cryptocurrencies. Many platforms that were enabling trading in these assets had to be shut down and traders began buying and selling Bitcoin and other cryptos on overseas platforms. With the Supreme Court quashing the ban last year, cryptocurrency trading platforms have begun operations again and are currently doing brisk business.
The way out
It is obvious that privately created cryptocurrencies with no regulatory backing cannot serve as legal tender to buy and sell goods in the country; that role has to be played by the RBI issued digital currency, which is currently in the works. But there is no reason to ban mining and other background activities of private cryptocurrencies since the people involved have no mal-intentions.
That said, the cryptocurrencies thus created can be misused by people with criminal intent for illegal money transfers. So the government needs a record of all the existing cryptocurrencies in the country and those that are freshly created.
Trading of private cryptocurrencies on trading platforms can also be allowed. But with regulatory oversight. This will give the government information about the exchange of cryptocurrencies between resident Indians and also help it tax the profits.
So, the first step is to set up a regulatory body to supervise private cryptocurrencies.
All those holding private cryptocurrencies on a specified date should register with the supervisory body and disclose their holdings along with their PAN numbers and other KYC details, which shall be updated on a central portal.
All miners should also register with the regulator and disclose the number of coins mined on a daily basis. The off-market transfers of the cryptocurrencies from the holders should also be disclosed and updated on a central portal.
The cryptocurrency trading platforms too should be asked to register with the regulator and made to adhere to net-worth, risk-management, disclosures and governance rules established by the regulator.
All traders on the platform should first register with the supervisory body and then trade on the platforms. The platforms should put out daily reports on transactions on the platform and maintain all records which can be scrutinised by the regulator at any time.
The Centre can consider taxing the gains made on these platforms, which will be an additional source of revenue for the exchequer.
No easy way out
Most governments have dismissed the private cryptocurrency ecosystem as being too small to require a detailed regulatory framework and have preferred to ban them outright or to ignore the presence of such activities in the country.
Both options are not preferred and India can set an example for other countries in legalising private cryptocurrency activities. Not only will this help address RBI’s concerns, it will also help in the growth of an ecosystem that could become the future of payment system, eventually.